JCL Blog

This weekend I was out at a friend's cabin and we decided that we wanted to watch Spy Game. (A great film even if you are not into the CIA genre, and if you are, no doubt you have already seen it.) The cabin has DSL, which I tested out at 9.5 mbps, a big screen TV with Apple TV installed. We had 4 iPads, and as many laptops and smart phones -- safe to say that if a movie was available, we should have been able to watch it.

Here is what we experienced:

Attempt 1 (Failed): Rent the movie on iTunes and watch on Apple TV. Turns out we could not remember the password of the account at Apple and we did not want to mess up the install by changing the user.

Attempt 2 (Failed): Rent the movie on iTunes on one of our iPads and then put it up on the TV using the Apple TV. We had been putting up you tube videos all afternoon from iPads -- so it should have been a piece of cake. Turns out that we would have to download the 4.3 GB file entirely before the movie could be watched. Every so often the DSL would hiccup and the download would start over. By this time everyone gave up and went to bed, but I kept trying to download it overnight. The closest I got was 2.5 GB.

Attempt 3 (Worked): The next day we started in on the project again. Maybe we could rent the movie on Amazon Instant Video on the web. Then launch the AIV app on an iPad and connect that iPad to the Apple TV. Hey, presto -- the move streamed. It only stopped once during the 2 hour movie when the DSL burped, but started right back up again.

After all of that fun, we were cleaning up the cabin and someone looked at the DVD library and what do you know.... Spy Game had been sitting there in its DVD box all the while!

Setting aside for a moment the fact that we could have watched the movie without a computer or an internet connection, Amazon won the day this time because:

They had the movie in their library (but so did Apple)

They were cheaper at $2.99 (but that was not a big part of our criteria -- in fact we also paid Apple $4.99 for our failed attempt)

But Mostly Amazon won because they had more pathways to success. In this case we rode over Apple TV, at home we have a TV with an Amazon app built in and that works well, and in other circumstances we have used Chromecast to put a browser window with the Amazon stream on the TV.

The biz is all cranked up over the Apple vs Google Maps thing that came from the latest release of Apple's mobile operating system, IOS 6. See this article in the NY Times.

In the background however, Amazon has been building its own maps capability. In July of this year Amazon bought mapping company UpNext and I think Amazon could come from behind to leapfrog Apple and maybe even catch up to Google.

Impossible? After all, the reason that Apple has rushed its mapping solution to market before it is ready is because Apple needs user data to improve the service.

Amazon just happens to have a close relationship, a codependent relationship some would say, with delivery companyies like UPS and FedEx. UPS has 250,000 drivers! It would not surprise me if there are 500,000 drivers worldwide driving all day, every day, delivering stuff -- much of which is from Amazon. This year Google announced it has driven 5 million miles collecting mapping data. If Amazon got its 500,000 drivers to collect map data -- that would be only 10 miles for each driver. It would take more time to install the collection equipment than it would to surpass all of Google's collections efforts so far. Call it a week to install the stuff and by the end of the first day, Amazon would have 10x the data that Google has collected.

Not only that, but professional drivers in every market in the whole world could return much higher quality data than users could.

This is the final post in a series that started with Big Pain Equals Big Gain that outlined how HP (and surely other companies) is in the position to capitalize on the changes it is going through, and that the technology industry is facing. Since then we have outlined how to Make it Unbelievably Easy, setting a New Transparency Standard, and putting HP at the Center of the Ecosystem, will contribute to a new competitive advantage for HP. In this post we address how all of this effort can Be Foundational. Change is hard work and we want this change to stick. Here are four cornerstone elements of a plan to do just that:

Remember

In this the age of big data, we have the ability to capture and keep every interaction and every transaction with every partner. This information can be used in the aggregate to inform decisions about policy -- but that is just the start. Pattern matching and other analysis techniques can help identify the power partners of the future. From the partner’s perspective, a large company that speaks in one voice is not only a pleasant surprise, but the obvious choice for the next transaction. So the cornerstone of the foundation is to capture and retain all information about a partner.

Share

Jeff Bezos challenged everyone in Amazon.com to expose their internal services as APIs to the rest of the company, and be prepared to do so to the outside world too. This mandate changed the culture at Amazon.com and the same can be said for any other company. Building on the first cornerstone of capturing and retaining all information, a functional API will ensure that the data gets used. Data that gets used - lives. So the second cornerstone is to share with defined APIs.

Relate

The value of information is dramatically enhanced when related to other information. Viewing sales volume in the context of a promotion deadline is much more valuable than the sum of the sales transactions. The relationship between captured data is almost as valuable as the underlying data.

Federate

No one can own all of the data. The desire to build a system that displaces other systems is incredible and has driven the launch of many all encompassing systems. The fourth cornerstone goes the other direction and federates data management -- therefore contributing to the health and success of many systems.

The beauty of this approach is that it can just be started one day. It does not require an outsized investment before any of the benefits can be realized. By adopting these cornerstones, a partner program can be completely re-imagined -- while underway -- and the benefits expand each day moving forward.

When I was a kid my mom taught me how to solve puzzles. She said to find the corners first, then the edge pieces, then assemble the frame, then sort the pieces by color... It was a sound process and surely was easier than randomly picking one of the 500 pieces out of the box and trying to figure out where it went. From that experience I learned that solving the puzzle depended heavily on the sequence.

It is interesting to see how the four big players in tablets computers: Apple, Amazon, Google, and Microsoft are each approaching their complex puzzles. Just like doing puzzles with my mom, the sequence is everything.

The first entrant into the market was Microsoft - over a decade ago. Bill Gates was correct that tablets were going to be big. We now know that his vision was extraordinary. Unfortunately, he was pulling one piece out of the box and there was really no hope of fitting it in with the other pieces.

Meanwhile, Steve Jobs was laying down the corners and the frame of his puzzle with the iPod. It was a simple but amazing device that enabled users to do one thing: carry 1,000 songs in their pocket. At the time the next best solution held only 10 songs. Then the iPod lead to the iPhone, the iPod Touch, all those apps and app developers, and finally the iPad. That final puzzle piece was easy to place in the picture because so many other pieces were in place already.

At the same time, Amazon was creating an amazing shopping experience for books and everything else in the universe on its web site. By the time it introduced the Kindle (same time as the iPhone in 2007) its puzzle was pretty well formed too. The Kindle put hundreds of books in your pocket and there really was not another alternative.

Just after that, in 2008, Google introduced its Android Operating System and the Chrome Browser. This story is a bit more complicated because Android was started outside of Google in 2003 and acquired by Google in 2005. Either way, the Google puzzle was being assembled well before the Samsung Galaxy Tab was introduced in late 2010. Add the proliferation of Android devices, 400,000 apps, and by the time we arrive at yesterday's announcement of the Nexus 7 a great deal of the Google tablet puzzle had been filled in.

It is true that there were a billion personal computers already running Microsoft operating systems when Bill Gates introduced his tablet in 2002. Surely that would form up the Microsoft puzzle. Right? So why does it seem like Microsoft is just now pulling out the first puzzle piece with the Surface and holding it over a blank table? Because Microsoft is trying to start a whole new consumer puzzle -- and all of its existing puzzle pieces make up an enterprise picture. Yes we use the Windows OS at home -- but it has not created any more of an ecosystem than Phoenix BIOS -- which we all run at home too.

It is going to be tough for Microsoft to complete its consumer tablet puzzle. The Surface may end up being a great device, it may get a great response from Microsoft's enterprise customers. But it is going to be hard to put the pieces together for consumers.

When I started my company in the mid 90s one of the big consulting firms wanted to charge me $83,000 to design a process for selecting a PBX/ACD for the call center. They seemed to think it was business as usual, so I guess some companies actually paid them to do things like that. The implication was that the cost to run the selection process would be an even bigger number, but I never learned the details because I was already out the door.

Now I can just go to RingCentral.com and sign up for a free trial and be on my way. No money to the consultants, no million dollar hardware purchase, no multi year maintenance contacts, no waiting six months through an expensive implementation process to see if it will work at all. We have come a long way in 15 years.

It seems that just about everyone is offering a free service as an enticement to check out their stuff. In some cases it is for a limited time and others limited functionality, but getting the technology needed to start a new company or start a new project is cheaper and easier than ever.

So in this new universe, what is that channel partner's (the consultant) role? They probably still get big companies to pay big money to design processes and implement them, but it is clear that they are not as essential to the selling process. The new Freemium model is an interstate highway right past their town. Cars may can get off and buy stuff, but they don't have to slow down.

Companies are finding expense reports showing purchases at amazon.com that are not books. Their employees found the line at the IT department for a new server to be too long, so they just went to AWS and rented one. Where is the channel in that purchase? The cars on that highway didn't even need to stop for gas.

When I started my company in the mid 90s one of the big consulting firms wanted to charge me $83,000 to design a process for selecting a PBX/ACD for the call center. They seemed to think it was business as usual, so I guess some companies actually paid them to do things like that. The implication was that the cost to run the selection process would be an even bigger number, but I never learned the details because I was already out the door.

Now I can just go to RingCentral.com and sign up for a free trial and be on my way. No money to the consultants, no million dollar hardware purchase, no multi year maintenance contacts, no waiting six months through an expensive implementation process to see if it will work at all. We have come a long way in 15 years.

It seems that just about everyone is offering a free service as an enticement to check out their stuff. In some cases it is for a limited time and others limited functionality, but getting the technology needed to start a new company or start a new project is cheaper and easier than ever.

So now what is that channel partner's (the consultant) role in the marketplace? They probably still get big companies to pay big money to design processes and implement them, but it is clear that they are not as essential to the selling process. The new Fremium model is an interstate highway right past their town. Cars may can get off and buy stuff, but they don't have to slow down.

Companies are finding expense reports showing purchases at amazon.com that are not books. Their employees found the line at the IT department for a new server to be too long, so they just went to AWS and rented one. Where is the channel in that purchase? The cars on that highway didn't even need to stop for gas.

I got into a conversation about the books I read last year recently and that has inspired me to make a list. So here you go: The books I read last year.

Actual Printed Books

Fear and Loathing in Las Vegas by Hunter S. Thompson

Hell’s Angels by Hunter S. Thompson

Fear and Loathing: On the Campaign Trail ’72

These books were not available on Audible or the Kindle otherwise I would have bought them digitally. They are all interesting reads and in particular, the volume about the election of Richard Nixon was a great reminder that politics is not more screwed up now than it ever was.

Kindle eBooks

Triple by Ken Follett: A great story about how Israel may have gotten the bomb in the 70s.

Lie Down with Lions by Ken Follett: If you want to understand what conditions are like in Afghanistan – this is a good way to do it.

One Click: Jeff Bezos and the Rise of Amazon.com by Richard Brandt: Short because the story is still being written, but good background if you are planning on meeting Bezos.

Steve Jobs by Walter Isaacson: My review here. No question the most inspiring book I read. Made me want to be "insanely great" too.

Public Parts by Jeff Jarvis: OK book by the author of “What Would Google Do?” – which was better

Paradise by Larry McMurtry: Re-read this one, a great autobiographical story about a trip to the south pacific.

Reamde by Neal Stephenson: A real page turner and good way to get the feel for China. Like many of his books, it is long and may not have needed to be.

The Garden of Eden by Ernsest Hemingway: Another re-read. This is one of the better posthumously published works.

The fortune ant the Bottom of the Pyramid by CK Prahalad: Did not make it all of the way through this book, but a good reminder of how big the rest of the world is.

In the Plex by Steven Levy: A great look what everyone means when they say Google is “engineering driven”.

Unconditional Parenting by Alfie Kohn: A wonderful book about how to constructively encourage your kids to do great things.

Ender’s Game by Orson Scott Card: Classic sci fi that I should have read a long time ago.

The Frugal Superpower by Michael Madelbaum: This is a must read for anyone who thinks we are at a crossroads.

Common as Air by Hyde Lewis: In the same vein as Free by Chris Anderson. Essentially a primer to the new economy.

Changing the game by David Edery: A good manual showing how to adapt computer gaming concepts to the real world.

The New Language of Marketing 2.0 by Sandy Carter: Sandy Carter is a Maven at IBM and this book shows how big companies are looking at new media.

Microsoft 2.0 by Mary Jo Foley: Mary Jo Foley follows Microsoft for ZDnet and this book lists some of her thoughts about how Microsoft could/should reinvent itself

You are not a Gadget by Jaron Lanier: One of our renaissance men gives a look into the good and the dangerous about the digital age.

Work Hard. Be Nice. By Jay Mathews: A must read for anyone thinking about our education system with a focus on the incredible work by KIPP.

Audio Books

The Marriage Plot by Jeffrey Eugenides: Another good novel by the author of Middlesex. Great images, not really uplifting.

The Beautiful and Damned by F. Scott Fitzgerald: Thought it would be fun to have this classic on audio.

The Great Gatsby by F. Scott Fitzgerald : ditto

The Diamond as Big as the Ritz by F. Scott Fitzgerald: ditto – what a story this one is too. If you have never read it – invest the hour.

I Live in the Future and Here is How it Works by Nick Bilton: The title is arrogant, but the book is really quite good.

Macrowikinomics by Don Tapscott and Anthony D Williams: I loved the first book, this one I only got half way through.

Boomerang by Michael Lewis: Of course my favorite book of the year is by Michael Lewis. All of the episodes were great but I found the Iceland part to be the best. My review here.

The Information by James Gleick: Quite dry, but if you are interested data, databases, privacy, new media – it is worth the effort to read this one.

Bossypants by Tina Fey: As my sister says, every so often you need some candy. This is right up there with Born Standing Up.

The Greater Journey by David McCullough: I love David McCullough, I think my life is too complicated to take the time to really think about Americans in Paris 150 years ago.

On China by Henry Kissinger: Boy did this guy take good notes! A great reference book and it is not too hard to see around the bigger than life ego.

The Social Animal by David Brooks: I generally like David Brooks on the NewsHour and in his column more than in his books. This one is good, but the fictionalization just did not work. He sure has read a lot of brain science stuff though! My review here.

Dangerously Funny by David Bianculli: A super story about the Smothers Brothers 3 years on CBS and all of the battles – if you are into the late 60s early 70s part of our history – this is a really good book.

The Clockwork Universe by Edward Dolnick: Who knew the history of calculus could be so interesting. I have probably talked about this book more than just about any other book I read in 2011 – well, except maybe Boomerang.

How the West Was Lost by Dambisa Moyo: I did not make it more than a quarter into this. By then she had made her point and it did not seem like continuing was going to bring any greater insights.

All the Devils are Here by Bethany McLean and Joe Nocera: Good fodder for the fire of the financial crisis and those who caused it (us!).

Griftopia by Matt Taibbi: Great book about how Wall Street is sucking the life out of our country. No problem figuring out where the author stands.

So there you have it. 39 books, 3 printed, and the rest about evenly split betweent the Kindle and Audible. There were about 10 other books that I bought but did not read including some manuals that I just looked stuff up in. I did not think a book should count if I did not take the time to get at least a quarter of the way through it. There were two books that I got on Audible and the Kindle. I did not list those twice, but that is an interesting study on whether these digital books are going to increase book sales or not. I would much rather pay $10 each for an audio book and ebook (for a total of $20) instead of $20 for one printed hardback.

Now if Amazon could just figure out how to sync them so when I open my Kindle it goes right to where I left off in my car on the audio book -- that would be amazing.

There were many great parts to the book and movie Moneyball. If you have not either read it or seen it – you should. In addition to the great storytelling by Michael Lewis, the main theme resonates in our business and just about everywhere: we now have the capability to track everything. This may not seem like a big jump from the prior method of measurement by sampling, but it is a big big deal. Sampling is the Nielsen ratings: where a small population of representative viewers track their TV habits and the results are applied to the total population. The tracking everything equivalent is having every single set top box send in data for every single viewer. The story in Moneyball helps to demonstrate the difference. To know from sampling that a pitcher behind in the count is 25% more likely to throw a fast ball than anything else – could help you. If you know from measuring everything that this particular pitcher is more likely to throw a fastball on the next pitch because you have a complete database of every pitch he has thrown in the past 5 seasons – well, that is different.

For the past decade, businesses have been making this same transition. From sampling data about their customers to tracking everything. The leaders in this revolution will win. The businesses that understand this will jump very far ahead of their competitors. The businesses that do not understand this will say that a statistically significant sample is the same as a complete database and will not go to the effort to track everything. They will lose. Some businesses, like the grocery stores, are tracking our every purchase, but I just don’t think they know what they have in the data. Here is my post from last year on that topic.

Governments will be in a unique position to capitalize on the data they collect. A dramatic example of that is happening right here in the Seattle area with the tolls starting on the 520 bridge. I can go online and see a record of every time my car has gone across the bridge. Imagine the possibilities here! Not only could parents or insurance companies learn about driving patterns, but some super smart PHD is going to figure out how to match up drivers for ride sharing – by evaluating the driving patters in the data. Or I could sign up for a service that sends my family a text when my car passes the tolling camera – that calculates what time I will be home based on the other traffic data.

In our marketing services business, we started tracking every single interaction about five years ago. Before that, the proprietary closed databases in many of our systems aggregated data – because storage space in the database was more valuable than individual activity records. Sounds hard to believe given the current environment, but these old databases actually wrote over themselves every night – just to save hard disk space. As a result we have pretty good predictive data on what will happen if we email an email address, or call a phone number, based on our past experience. Using that experience data, we direct resources to the highest value activities first. It is a game changing practice.

Privacy experts say that this kind of customer data collection is an invasion and should be made illegal. There definitely are steps that should be taken to protect the consumer and protect the data. Increasingly however, customers are demanding that the businesses that serve them know their stuff. Today there are many simple requests that I want in this area. I want Amazon to tell me if I am buying a book for the second time. I want the credit card department at my bank to realize that I already have a credit card and to stop calling me with new credit card offers. I want Starbucks to know my order before I order it. I want Delta airlines to know what seats l have sat in. This is just the beginning.

Just like with other networks, the Last Mile connecting a Partner Network to its Partners is expensive and complicated.

All channel partner programs have infrastructure designed to manage the relationship with partners. From the simple to the sophisticated, this infrastructure accomplishes a variety of critical tasks including registering partners, enabling them with sales materials and support, delivering leads, tracking performance, managing certifications, and many other functions. These processes and systems are in effect a network of sales and marketing people and PRM/SFA databases and applications.

To function, all networks must reach their customers and a partner program network is no different. The link between the network and the customer is called the last mile, and just like with a phone network, the last mile is the most challenging because the investment required to reach a new partner is uneven, and in many cases will never pay off. Extending the phone network to the last farm on the road will never make financial sense – that is why the FCC has made the phone company provide service to everyone.

Companies have tackled the last mile problem with their channel partners in three distinct ways:

Invest everywhere and dominate the market (Microsoft)

Invest heavily in obviously high value partners (HP)

Make the partner come to the network (Google, Amazon)

These differences are logical when taken in the context of gross margins. Microsoft and other software companies have the highest gross margins, so they can spend much more than everyone else. HP and the hardware companies have much lower margins, so they have to be more careful to invest only where they know it will generate additional sales. Google and Amazon and other similar businesses have many more partners, and their transaction size is much smaller – making anything other than a fully automated approach hard to justify. It is just not possible to cater to the individual needs of partners if there are millions of them.

As the technology industry evolves and these companies move into new markets, they will have to adapt to new margins and transaction sizes. This will be much easier for companies working up the list, than those working down the list. Those with skills developed in low margin and small transaction sized businesses will have to learn to invest more in the last mile – learning to spend more is enviable compared to those who have to learn to spend less.

A smart Wall Street guy recently described to me a new way to think about the value of a stock in an overheated market. He proposed that there were really two parts to value. The first of course is the underlying value of the share. And the second is the option the holder of the share holds implicitly to sell the share at a time of his choosing. This could be called the option to sell to the greater fool, but let's not start calling people names.

This second layer of value can be greater than the first. In other words, particularly in a momentum market, the right to sell is worth more than the stock itself. This is interesting because it is a good visualization of an emerging class of assets that derive their value entirely as a function of their relationship to an underlying asset.

Some will say this is nothing new. A steak at a steak house costs three times as much as a steak at home. Such an item could be described in two parts as well: the steak and the experience of eating it at the steak house. Again the second part is likely more valuable than the steak itself. Milk at the Mini Mart has two parts, the milk, and the convenience of buying it quickly.

In markets where innovation is changing the cost of producing and delivering things, the cost of the underlying asset is decreasing quite quickly. Take ebooks for example, the cost to create and deliver the next copy of an ebook is essentially zero. This creates an environment where it is easy to see how there is relatively more value in the second, derivative asset, than in the ebook itself. The derivative asset to an ebook could be merely the recommendation of the right book, or who is reading what book, or comments about the book, or quotes from the book. If you were about to pitch a big deal, how much would you pay to know what the person on the other side of the table was reading the day before your meeting? At the risk of offending the authors who clearly invest themselves in their craft and create valuable work, we must ask: Is there more value in the marketplace to the second level information about the book than in the book itself?

Apple, Google, Amazon and Facebook have been named as the new horsemen in technology. These companies recognize the value of being one layer removed from the actual asset. Google and Facebook both pay their customers (by offering free services) in exchange for this second level information – so clearly they assign value to it. Apple exploits the second level information less than the others – mostly because it’s history is making money selling devices. They are getting smarter about this all of the time and the Apple iCloud announcements last week betray their interest in being in the second level game. Amazon is the one with the superior business model. Not only does Amazon make money selling products, but they are expert at using the second level information to sell even more stuff. Amazon has a much more concrete awareness of what you “like” and knows how to use that information to present you with other products to purchase.

More examples of this construct emerge every day, and many in places commonly thought of as confidential:

Banks: I received an offer today from my bank to purchase access to their database of financial statements. These are financial statements their customers have submitted as part of their traditional banking relationship. Banks make money in many ways, and now they are making money selling access to the information they collect about their customers.

Phone Companies: The contents of your phone call cannot be “tapped” without a search warrant, but law enforcement regularly pays the cellular companies for the second level information. That data includes, who you called, how long you talked, and where you were (while talking or just while the phone was on). Law enforcement does not need probable cause or a search warrant to get this information and the cellular providers have automated access to the database, so the fees they collect are pur profit.

Credit Card Companies: Your credit card issuer makes 2 to 5% off of every transaction, plus they sell the information about how much you spend at what vendor. Soon you will be seeing advertisements on your credit card bill.

Where could this go next? Here are the services I would like to buy:

On the plane: I would pay extra to sit next to a thin person or better yet a client or potential client. In the case of the potential client, I would probably pay more than the cost of the ticket itself. This could also go for any event.

Buying Things: The next time I buy a house I would like to know which houses are going to come on the market next. So information about people looking to move, getting transferred, or experiencing other life changes would be valuable to me. Facebook could have this already, but other big databases will likely get mashed up to provide information like this.

Healthcare: The next time I get a cold or the flu, or better yet, before I get a bug, I would like to go online and see what is happening in my area. Who is suffering symptoms (Google has this because people do searches for their symptoms, the healthcare companies have it once people go to the doctor, and schools and employers have it once people call in sick) plotted on a map and compared to historical data.

The Government: The government could become the biggest player in this area. Think of the gold in the IRS’s databases.

Things are definitely getting interesting. Maybe my next post should be about privacy!

Erik Schmidt got some attention at the All Things Digital conference naming new horsemen in the tech industry. The old horsemen were commonly listed as Microsoft, Intel, Cisco, Dell. Schmidt rather self congratulatorily named Google, Amazon, Facebook and Apple as the new four. Sure things are changing, but a completely new field of horsemen, really?

What is it with the horsemen anyway? One must wonder how we got onto the horsemen thing in tech, it seems like we would want to stay as far away as possible from an allegory rooted in conquest, war, famine and death. If you have some time to kill, check out the Wikipedia entry for the Four Horsemen of the Apocalypse, for a not so brief introduction to the idea of horsemen.

Is there a new reality in tech and if so is this it?

With the possible exception of Dell, which specialized in advanced supply chain management, the old four developed technology and sold it to individuals and businesses and those customers employed the technology to achieve their ends. The old horsemen are in fact still in business, and will be for some time. IBM may not have liked being left off of the old list, but they have done pretty well for themselves in the last decade with their stock up 50% in the last decade compared to losses for the others.

With the possible exception of Apple, the new four don’t sell technology at all. I suspect they are often thought of as technology companies because of their use of the Internet in their business models. The wholesale switch is notable, and mostly for Microsoft. Indeed, Microsoft has not been performing well on the stock market over the last decade with a drop of over 50% while all of the others are up and Apple is up a whole bunch.

These new horsemen are going to drive the delivery of a new kind of computing services. Even if this shift only turns out to be half as big as Mr. Schmidt predicts, it is going to have a profound impact on how technology is sold. This is commonly referred to today as the migration to the cloud, and is so overhyped that often we forget to stop and think about what that actually means.

First a review, technology resellers used to make money marking up hardware and shrink wrapped software. Then they made money adding integration and support services to the sale of hardware and software, and next they will make money delivering innovation. Here are some examples of this phenomenon:

DropBox (www.dropbox.com) is a file system in the cloud. You can get to your files from any device. It is Amazon’s infrastructure on the back end, but no one has to know that.

WordPress or SquareSpace (www.wordpress.com; www.squarespace.com ) are content management systems in the cloud. Anyone can publish a website or blog on these sites and all of the hosing is handled. Although one step removed, these companies rely on Google for indexing and discovery. Google is also seeding the next wave of these companies with Picasa and Google voice. These may seem like birds of a different feather, but before you say so think about searching images or audio files. Google’s partners make money by helping their clients manage content and show up online in the right places.

Security is making sure content does not show up in the wrong places like when credit card information is stolen, or weapons system blueprints land in Peking. Facebook has designs on knowing who you are and where you are and (soon) what you buy and what you have access to. Making sure the keys to the kingdom, your keys that is, remain in your own control is important and will be big business. Emerging in this field are upstarts like Reputation.com and Klout.com, and established firms like Symantec.

Before you think that this blog post has gone off of the rails, let me state plainly that I am not proposing DropBox, WordPress, SquareSpace, Reputation.com, and Klout.com as services that partners can mark up and resell. I am proposing that these are the new channel partners and that they exist in a sympathetic ecosystem with the new horsemen.

These forward thinking channel partners do not think of themselves as channel partners. They think of themselves as the inventors of a new wave of services. Nevertheless, they are channel partners because they make money packaging new technology into services that add value to consumers and business.

I love speaking to groups so yesterday was a great day for me. The setting was an internal planning meeting for one of our clients, the subject was creating customer loyalty, and the context was customer service. I speak in front of groups fairly often and this one turned out to be particularly fun because the people were clearly passionate about the subject and were eager to jump into the conversation. The title of my presentation was Five Assumptions that Drive Loyalty, and when I say assumptions I am talking about assumptions we need to make about the customer. They are:

The Customer is Smart

The Customer is Well Intentioned

The Customer Values Their Time

The Customer Has Friends (power)

The Customer Will Share With Them (will use it)

These assumptions are so obvious that they really don’t need much explaining. However, they are not that easy to accomplish. Making your customers wait in line is a clear way to tell them that you think your time is more valuable than theirs – and we all hate waiting in line. Despite this, no one has figured out how to get hundreds of people onto an airplane without making them wait in line.

During the presentation I was also able to squeeze in two other of my favorite points:

Customer / vendor relationships can only be in one of two categories (buckets): “Unbelievably Great” or “There Has To Be A Better Way”. There is no middle ground. Any company that accepts the middle ground of “Good Enough” is only deceiving themselves – because their customers are absolutely in the “There Has To Be A Better Way” bucket.

Companies must find structures for their businesses that naturally promote positive relationships. Blockbuster’s late fees cause everyone to look for an alternate solution. It is not that Blockbuster is unjustified in charging the late fees, because clearly they have to get their movies back. It is that the late fees drive the customers away. Netflix found a way to build a movie rental business without late fees – and their customers are very loyal as a result. I suppose their amazing execution also helps.

In the discussion a number of very interesting ideas surfaced. This of course is the most fun part about getting 150 smart and energetic people into a room – ideas just appear and there is a pretty good chance that no one might have come up such great thoughts sitting alone in a room. Here are the three ideas I like the most in our conversation:

Customers are loyal to companies that manage their information well. In its simplest form this means not making the customer give basic information over and over, but rapidly accelerates to using customer history to improve the experience. Log on to Amazon.com and you can easily see your entire purchase history, and Amazon.com is also using that data to make recommendations to you about what you might like to purchase next.

Customers are loyal to companies that trust them. If you lose one of Netflix’s DVDs, just tell them, and it is no big deal. I bet many customers find the lost DVDs later and actually return them – even though they do not have to.

Customers will pay. Customers are exhausted by poor quality free things and are ready, willing, and able to pay for quality.

We ended the hour talking about the companies that do a great job creating loyalty in their customers. The list included: Zappos.com, Netflix, Apple, Amazon.com, and Starbucks. Don’t be shy about adding to the list.

Companies have been citing economies of scale as reason to acquire, merge, or grow ever since the beginning of industrialization. It is not hard to grasp the idea that the cost of each additional unit will drop as more units are produced. There are every day examples of this from ordering business cards to getting the next bigger bag of popcorn at the theater. Doubling the size of the order rarely doubles the cost. In addition to increasing competitiveness by lowering production cost, manufacturers have also been heavily incented to acquire their suppliers to secure raw materials consistently. In addition, when significant research and development investment is required - large scale is required to justify that investment. Bringing a new drug, airplane, or car to market can only happen when large scale production is the likely outcome.

Natural monopolies are sometimes formed when new technologies are discovered and more so when large initial investments are required. The first railroad, telegraph, and electrical grid are good examples of natural monopolies. Once the track was laid down, the cost of running the train was so much less than the next competitor (who still had to build their track) that protecting the monopoly and remaining profitable was not only conceivable by likely. In the case of the telegraph, the network effect rewarded the first to market because the usefulness of the network increased as more people were connected to it, further securing the monopoly.

For all of these reasons we have lived our entire lives in a world where bigger was better. Until now.

Over the past 30 years just about every part of business has been disassembled and the parts can now be purchased as needed, when needed, and for cheap. Big time computing infrastructure is available for rent. Enterprise quality business process systems from the mundane (travel expense management) to the exotic (advanced materials management) can be provisioned in a matter of days and delivered economically to large and small teams alike. Anyone with an idea, some know how, and a credit card can bring it to life and to market faster and cheaper than ever before, and tomorrow it will be even faster and even cheaper.

The railroad company may still have a monopoly on the use of its tracks, but the customer can pick from any of dozens of carriers that are putting containers on the train, so businesses large and small are able to ship their products anywhere for no initial investment, and very low cost. Amazon.com may own all of the distribution centers, but anyone can sell their products through Amazon.com. Apple may own the iPhone, but just about anyone can put an app in the app store. Google may have the biggest search engine, but anyone can buy an ad.

However, before we get too excited about this new world of entrepreneurship we must look at the remaining barriers. There are still two large hurdles: government regulation and selling cost. Any large firm not offering access to its railroad tracks is doomed unless government regulators can be deployed to prevent competition. Also, in selling, some large businesses can prevent their customers from being exposed to new entrants by blanketing the market with salespeople. Oracle and its mini-me Salesforce.com, dedicate $5B (20% of revenue) and $700M (50% of revenue) respectively to sales and marketing. They have the reach to simply shout down any competition for customer mindshare.

These government and selling advantages are significant because to date they have overcome the many large firm disadvantages. Poor performing employees have many places to hide in big firms, even top performers spend an inordinate amount of time fighting internal battles, and real live feedback from the marketplace rarely makes it through the ranks to the top decision makers. For these reasons top talent gravitates to smaller firms where the opportunities for advancement and the big payday are greater and there is just plain less brain damage. The small firms have the smartest people, whose motivations are more closely aligned with business success, who are closer to the customer, and who have access to all of the tools and infrastructure previously only available to the big players.

Both of these problems are self-correcting.

Government protection may benefit a business but it kills the market. More people every day make their residential location decisions based on access to high speed internet. Taken to the extreme, these decisions may not be between one part of a city and another, but instead over an international border. People went to Canada to escape Nixon’s draft, why not Australia to escape the reach of Genachowski’s FCC? It is not hard to imagine a young software engineer with school age children attracted to Australia by fiber to the home and good schools. Comcast and its lobbyists win in the short term, but even they lose in the end as they ride their shrinking market into the ground.

WikiLeaks may offer a middle ground to the all or nothing proposition of killing the entire economy. They have announced plans to release documents targeting big business starting with the big banks. It is suspected that the first target is going to be Bank of America. This will expose the tactics large enterprises use to protect their positions. In banking it is likely the manipulation of the bank regulators and deceiving their government and shareholders about their financial condition. In technology it will probably be the anti-competitive behavior associated with patent trolls, mergers, and the implementation of standards.

In Selling, the small firms need to push forward while gravity does its work. Salesforce.com spends fifty cents of every dollar of revenue on sales and marketing because they can. With 95% gross margins, they have the money. The increased competition from the many small businesses offering sales process automation tools will drive gross margins down. Each bee sting may not seem like much to worry about, but even Microsoft expects its margins to drop from over 80% now to 40% as their customers move to a cloud computing model. This is happening to the entire industry and the big spenders on sales and marketing are going to either get crushed, or adapt. Either way, there will be much more oxygen available for the little guy at the customer’s table.

As the disassembly of business offers opportunity to small up starts, the big established firms will dissemble. Watch for support of entrepreneurial activity while absorbing potential competitors, claims of working with the government to open markets while increasing regulatory burden, and ever increasing attorney headcounts. Change is hard for anyone and really hard for the big guys.

Even though a significant majority of technology purchases are made by businesses, the consumer is rapidly gaining a meaningful position in the market. According to Gartner, in 2010 businesses will drive 72% of technology purchases. The iPhone/iPad revolution is largely driven by consumer purchases. As these devices are introduced into the enterprise computing environment, IT professionals are developing strategies for managing them. Forward thinking technology marketing people are presently working to understand how these changes will impact IT purchasing decisions in the enterprise.

Here we examine the arc of this revolution and make an attempt to help marketers position themselves for the evolved technology marketplace.

The Cost of Selling is High for the Enterprise and Low for the Consumer

Maybe it is cheap to sell to the consumer because consumer products are cheap, or maybe consumer products can be offered cheaply because it is cheap to sell them. Either way, it costs much less to sell to the consumer than the enterprise, and in some cases the cost of customer acquisition is approaching zero. Alternatively, over on the enterprise end of the spectrum, we find companies like Salesforce.com – whose largest expense is for customer acquisition. For 10 years SFDC has spent over 50% of their gross margin on sales and marketing – and this year they will spend over $700 million. Ten times as much as it will cost them to deliver their services. Right behind Salesforce.com are Oracle, IBM, HP and Microsoft each spending over 20% of their gross margin on Sales and Marketing.

When it comes to selling the approaches cannot be more different, consumer companies like Google sell by getting their customers to act as their own salespeople (filling out a form on the web), quite a contrast to Salesforce.com and the others who are seeking business customers by blanketing the earth with salespeople and partners.

Getting to Market: To Advertise or Not To Advertise

Even companies with buckets of money must select a go to market strategy and concentrate their resources in what they believe are high value activities. There are as many opinions about which strategy works best as there are CMOs – but just about all CMOS will agree that resources must be concentrated in high value activities consistent with their strategy. Anyone spreading their resources thinly over too many activities is doomed. The decision tree starts with advertising. There are companies like Apple and Dell that go big on advertising and PR and companies like Microsoft and HP that invest their resources in building partner ecosystems. A completely different third approach is lowering prices so far that solutions sell themselves. Google and Craigslist price their services at 1/10th of their offline competitors. Prices this low promote themselves – a $3,000 car or a $1 movie ticket would not require advertising or salespeople – the newspapers would write about it and the message would spread virally.

Let Someone Else to Pay

There is no charge for using a search engine or web service like Twitter or Facebook. Using a free product does not make you a customer however. The customers of these companies are the advertisers, and their payments for advertisements make it possible for companies like Google, Twitter and Facebook to offer valuable services for no charge to those benefiting from them. No monetary charge would be a little more accurate. The truth is: those not paying for a service are not the customer, they (or their data) are the product being sold to someone else. This is where the gulf between consumer and enterprise gets interesting. Individuals are much more willing to give up their data in exchange for a free service. Enterprise data is almost always a strategic asset and therefore most businesses are reluctant to trade their data for services. Salesforce.com’s clients are businesses and they pay for the service because giving up their data to be sold to a third party would undermine their viability. Google gets right up to the line on this one because they are selling the data they have about their customers to third parties – and many of their customers are businesses. Admittedly Google is not going to one client and saying they will sell the content of another client’s searches or emails. They will however allow one client to present advertisements to a targeted audience that is likely to include its competitor’s customers or employees. This is evidence that the gap between consumer and enterprise buying habits is closing.

Mixing it up: Put the Blender on Whip

Twenty years ago, with the exception of a few intrepid door to door salespeople, the consumer went to the store and salespeople called on businesses. Then Amazon.com brought the store to the consumer’s home, and Dell cut out the salesperson by giving businesses the ability to serve as their own salespeople over the phone and web. The consumer and business buyers including those in the technology market had been oil and water, and they were about to get poured into the blender. When the first killer app for the consumer oriented Mac turned out to be the business oriented use case of desktop publishing – it was like hitting the chop button on the blender. Employees connecting their home computers to corporate networks, enabled largely by broadband deployment, was the equivalent of the stir button. Social media tools like MySpace, Friendster, LinkedIn, Facebook, and Twitter turned the blender up to puree. And as we are learning in our one question survey this month, the iPhone and iPad have cranked the margarita making machine up to whip and the water and oil have emerged as thick as chocolate mousse. With consumer tech and enterprise tech all whipped up together, selling technology now takes on a combination of enterprise selling and consumer selling tactics.

Enterprise Marketing Must Change

Right now there is a great deal of energy being invested by enterprise marketing people in social media. This is important, but not the only area where the enterprise / consumer collision is impacting the market. We will never know if the big brains at Apple developed their iPhone/iPad strategy with an eye on the enterprise market. Intentional or not, their shiny new devices are changing the marketplace and buying patterns significantly. Starbucks is moving to HTML 5 and away from dot net as a result. Flash is being marginalized. And products like those from Parallels that tie the new environment together, are ramping fast. Enterprise marketers need to free their minds from a focus on making the things they have always done more efficient and start experimenting to develop new strategies that are effective in this new marketplace.

On the Horizon

As participants in technology marketing for the enterprise, these are the trends we expect to see accelerate as a result of the blending of the consumer and enterprise markets:

Social Media: Clearly social media will be central to these changes, both driving and being driven by the marketplace evolution. The key to social media is authenticity. They key to authenticity is flexibility and IQ. Companies with intelligent and autonomous actors on social media platforms will win. It does not hurt that the highest value customers are the early adopters of social media. 100 years ago, when telephones had been deployed in 10% of the households, companies realized that the early adopters of the telephone were on the high end of the socio-economic ladder and should be treated as such. Once telephones achieved 98% penetration, and the overwhelming majority of phone calls came from average customers, companies shifted their approach from high investment in high value customers to cost containment. This is why a Comcast customer can get a high quality response from @comcastcares, and not from the Comcast call center. Comcast knows the demographics of their social media savvy customers. It will be some time before social media is democratized. To Do: Get smart people into the social media game.

Computer Operators: Before the computerization of the telco central office, switching was done by telephone operators. An operator could manage approximately 200 telephone lines. We now have 180 million land lines and over 200 million mobile lines in the US. If we had to rely on manual switching – we would now require 1.9 million telephone operators. Thanks to automation we only have 22,000 telephone operators now and none of them are switching calls. In the early days of the computer an operator with significant training was required to run the device. This continued during the early days of the PC. The devices were complicated enough that every user was essentially a trained computer operator. It has only been in the last 10 years that computers could be operated without the barrier of significant training. The iPhone and the iPad are revolutionary in that they require no specific training at all. A child can pick one up and figure out how to use it. Many businesses now operate without a single IT resource on staff. Computer operators are not dead however, they have shifted to managed IT service providers, web service operators, and application developers. This trend will continue to accelerate. Business will be less technically aware and will purchase services from specialized service providers. The service providers will have all of the computer operators and accordingly will increase in sophistication and technical capabilities. This will split the marketplace into the sellers of the services and the sellers of the underlying technology. The services will be purchased by people with business needs and a low level of technical sophistication. The underlying technology will be purchased by people with an extremely high level of technical sophistication. To Do: Market services by business use case and technology by engineering merit.

Partners Migrate to Service Sales: The bifurcation of technology into unsophisticated (technically that is) buyers of services and very sophisticated buyers of the underlying technology will force a split in sales and marketing strategy. The big technical deals will get bigger and will be increasingly sold using internal salespeople. This will shrink the high end of enterprise technology sales and marketing done through partnerships. Who is going to sell servers to Amazon.com? IBM, Dell, HP, and others will be competing for that deal directly. Who is going to sell desktops to the law firm? Channel partners. Historically those partners have been companies. Of course because partnerships are relationships, and relationships are between actual people, the reality has always been that the success of these partnerships depend heavily on the relationships between the people inside the companies. For fifty years, people have been getting more and more mobile, a trend that has been accelerated by the latest economic challenges, and facilitated by social media tools. Technology companies that are able to shift their thinking from partnering with companies to partnering with people will jump well ahead during this transition. To Do: Orient partner programs to individual people that sell services.

In the years ahead businesses will remain the most significant source of revenue in the technology industry. Businesses will however increasingly behave like consumers when purchasing service offerings. They will be looking for cost effective solutions to their most pressing needs, and they will be buying those solutions on short lead times and with relatively low technical sophistication. Vendors and solution providers that position themselves for this change will win in the transition.

It was right here in Seattle in March of 1922 that Remick's Music Store purchased the first radio advertisement on station KFC, some months later on August 28, 1922 the Queensboro Corporation in New York City advertised apartments for rent on WEAF. In those days the results were dramatic. The ads that worked -- really worked, and those that did not were not renewed. By worked of course, I mean produced more sales. Back then you advertised to get more sales. Now the reasons are more complicated.

There are whole books about how and why to advertise. Here are my thoughts about the real reasons:

Surface New Opportunities: Of course an advertisement cannot actually sell anything. Even on the web, an ad can only deliver the prospective customer to the web site. The selling is up to the advertiser. Some sales are a quick order processes - buying a movie ticket on Fandango for example - but most involve a sales process beginning with the new opportunity and ending with real revenue. So even today the number one reason to advertise must be to drive new opportunities into your sales pipeline.

Improve name recognition (build the brand): Brands are important and advertising can introduce people to your brand. Interestingly, Millward Brown just released their survey of the most trusted worldwide brands and Amazon.com got the #1 spot in the USA. I would venture to say that Amazon.com somehow achieved this without advertising. "Advertising is the price you pay for having an unremarkable product or service," said Jeff Bezos at the 2009 Annual Meeting as reported by the Seattle PI.

Defend against the competition: Every industry has a publication that is central to their universe. This publication, whether on the web or in print, has the trust and the eyeballs of just the people you want to sell to. An advertiser can work to exclude their competitors from the publication as part of their agreement to advertise. But only as long as the company continues to advertise. So if you want to keep the competition out of a publication, just advertise.

Make the sales department think marketing is doing something: Sales is measured by revenue, marketing is measured by.... well we still don't know. Marketing should be measured by the delivery of new opportunities to sales. Absent the ability to track such a thing, most companies resort to measuring marketing by the perception of performance. Advertising is visible and leaves a perception.

Get recognized at industry events: Companies like to get recognized just as much as people do, or for that matter, just as much as movie people do. What if you could get an academy award for your movie just by spending a few extra dollars advertising? Luckily the academy works hard to prevent that kind of thing. If you want to get recognized in your industry, advertise with the people who give out the awards.

General employee feel good stuff: We have come to think of the people that run Google as logical, quantitative types. So why spend the big bucks for a super bowl ad when 70% of the searches done in the world are already done on your site? To make sure your employees feel great about working at Google. It worked and it only cost $2.5M.

I am not trying to say that companies should not advertise. There are cases where advertising is absolutely the right tool for the job, but you must know what the job is. I wrote another post about Getting the Digital Dollars that proposes that as advertising gets more measurable -- sales of advertising will actually increase. I still think that is true.

Companies that can measure the impact of their advertising on specific new opportunities in their pipeline will be rewarded.

It seems like everyone wants to be in sales these days. The twist is the new entrants want to be in sales -- without salespeople. I spend good deal of time thinking about this because my company is an outsourced provider of sales and marketing services.

In the past decade many web based services have forever changed the way that customers interact with the makers of the products and services they buy. And those interactions are being done more often than ever without the participation of a salesperson.

Travel: Web services like Priceline, Expedia, Hotels, and Kayak have been cutting the travel agent out of the travel business for over a decade now. Some of these services have real people in call centers somewhere, but I rarely talk with them and I suspect you don't either.

Specialty: You can buy just about anything from Amazon, eBay, iTunes, and Craig's List without ever encountering a salesperson.

Advertising: Google is working hard to position itself as the salesperson for everything, but for now they are mostly disrupting the sale of advertising. Google leads the market for advertising on the web through its AdWords and AdSense programs in a largely self service model.

Homes: Zillow has not completely blown up the realtors yet, but it may not be long.

Cars: The great recession has caused the car manufacturers to dramatically reduce the number of car dealerships. And car dealerships were mostly full of salespeople. Car buying may be the next thing we do without the aid of salespeople.

Everything Else: Last week a the latest digital personal assistant, Siri, was launched. Yes I know, the Newton never panned out for Apple, and the world (and a box in my garage) is filled with failed PDAs, but if this one gets over the top, it aims to be the salesperson of everything from taxis to concert tickets. All of this done without any actual salespeople.

We are coming into earnings season and accordingly we have the chance to look at the financial reporting of companies in our industry. IBM and Google both posted their numbers last week and that got me to thinking about one of my favorite subjects -- how companies choose to spend their money. Specifically I am interested in how much a company spends on sales and marketing, how that compares to engineering (R&D), and how they each compare to the amount of money a company has available.

We know that gross profit as the amount a company has available to spend on all things not associated with delivering their products or services to customers. There are essentially four places this money goes. General and Administrative, Sales and Marketing, Research and Development, and Profit. A company cannot survive without just the right balance of each of these four things. So I thought it would be interesting to take a look at how eight well known companies in the technology industry choose to spend their money.

Here is a graph comparing the companies on sales cost as a percentage of gross profit. Google has made a big point that their products are so good they sell themselves. They clearly are backing that up with good performance. They are only spending 13% of their gross profit on sales and marketing. The only company spending less is Amazon at 11%. One could argue that insufficient investment is sales will show up in slower growth rates -- but both Google and Amazon are defying that with 8% and 20% growth rates respectively. Salesforce.com is also growing at 20%, but is spending 57% of its gross profit on sales and marketing. So I think you want to be on the left end of this chart -- spending enough to grow the company but not too much.

Anyone wishing to have products that are so good they can sell themselves should be investing in R and D. One of the highest impact decisions a CEO can make is allocating resources between sales and engineering. The temptation is to invest more in sales because the results will show up faster there. But a company that starves its engineering effort in order to invest in short term sales results will pay the piper later. Here is a graph showing R&D spending as a percentage of gross profit. I think the left side of the chart is where you want to be for long term health in the company.

Once we add the two together, it is interesting to see that Apple, Google, and Amazon end up on the good (left) end of the chart. And all three of them are also turning in impressive growth numbers. The stock market agrees with this analysis because these three companies are on the high end of P/E ratios as well. Strangely, the highest P/E ratio of all is for Salesforce.com -- a staggering 110. I don't get this. To me it seems like Salesforce.com is having to try very hard to generate revenues by spending 57% of its gross profit on sales and is investing less than anyone in R&D. Could be a correction in the works there.

Finally, I think sales spending and engineering spending diverge in one significant area. Sales should always be compared to near term revenue, but investments in engineering can in some cases be disassociated with current revenues. In other words, size does matter here and this is where we see Microsoft flex its muscles. Microsoft is not spending the highest percentage of gross profit on R&D, but it is way ahead of the pack on total dollars committed -- over $9 Billion! This is a full 50% more than the next biggest number which is IBM -- who has 4 times the employees and two times the revenues.

Microsoft is spending six times as much as Apple. So far Apple has been the premier innovator -- something that will be hard to forget this coming week. But don't count Microsoft out yet.